Blog· 3min January 25, 2023
With the ongoing shift to real time payments, we have seen drastic and rapid change across the domestic payment landscape. Instantaneous transfers, while not historically new, have evolved significantly over time. As of 2022, up to 72% of the world has a live or upcoming real-time payments infrastructure.
However, in the international payment space, we have seen a relatively slow movement to real time. This begs the question of where improvements can be made to not only facilitate real time delivery of payments, but also introduce other real time processes. These processes will help streamline elements of the international payment chain and strip out unnecessary costs and risks, which in turn will increase efficiency for consumers.
With the digitization of payments dramatically driving demand in the cross border space, the pain points experienced by small businesses is even more acute. The typical journey of cross border payments is complex. The journey is associated with high fees, it lacks visibility, certainty and predictability of payments, and lacks data payloads and messaging. The existing ways to make cross-border payments often falls short of small business requirements for better speed, visibility, fees and the guarantee of full value delivery. If the true cost was analysed for the continuation of utilising non real time FX rates, it would cause huge concern when considering currency conversions. This may well get overlooked as an issue, but the real impact on a customer is significant.
If a business is reliant on the exchange rate to ensure profitability and sustainability, having no clarity on the actual exchange rate achieved until after a transaction is booked seems senseless. It may sound slightly archaic that real time FX rates are not the norm, but across the US many banks work to FX rates that are updated every few hours, and do not track the live, ever-changing interbank market rate. Financial institutions are still relying on a customer calling a bank’s wire desk for a real-time FX conversion rate. This creates friction in the process for the customer as well as increases overhead for financial institutions. In fact, 61% of companies are experiencing issues with foreign exchange rates, labelling them “a significant drain on resources”.
Take into consideration the recent volatility we have seen in the market, especially when considering the USD’s close friend GBP, which are two of the most traded currency pairs. Whether pairing for travel money, paying manufacturers, payroll or repatriating profits, their conversion is a huge consideration in global money movement.
Recent political tensions and disruption in the houses of parliament have seen a collapse in GBP value against the USD. The real impact of this was a 35% increase in USD value vs sterling, with some of the major movements happening in a matter of minutes as opposed to hours or days. When considering that static rates are sometimes updated daily or every few hours, consumers would certainly be on the wrong end of this move, and purchasing well below market value. This lack of visibility also raises questions of trust. If the rate at time of purchase is above the static rate indicated, will the customer gain the full benefit for the improved rate?
Rising pressure for more transparency in FX transactions, and the need for businesses to look at ways to protect profits and drive down hidden costs, decrease margins, and remove the need to rely on manual and sometimes static FX processes is pointing toward real time 24/7 FX rates. The technology is certainly there and across the pond in the UK, Real Time FX rates via an API are not only feasible, but expected. Manual execution via markets desk is not a thing of the past, as it certainly still has its place, but perhaps for everyday FX execution and simple international corporate payments, a fully automated and real time rate experience would make sense. It would give the much-needed transparency and clarity to a process that is a black hole of hidden costs, fees and commissions.
Most banks still use an exchange rate that will apply for the entire day. As a result of not usually using live exchange rates, they have to build in a margin of about 5% on all international money transfers to ensure profitability even if the currency fluctuates dramatically.
The benefits of integrating a real time FX solution becomes clear, and key areas of improvement include:
1. Faster fulfilment: For a high velocity of transactions, efficient and swift fulfilment of transfers is optimal for customers, suppliers, merchants
2. Transparency: Provides the ability to move rich data, which can provide actionable insights into client needs, particularly for corporate customers.
3. Payment Confirmation: Provides the ability to confirm payment without tracking the transaction. With RTP integration, platforms can be assured the beneficiary account has been credited with the value.
4. Loyalty and Retention: By offering these improvements to customer experience, customers are more likely to return to the platform because stability and speed are ensured in their payment.
As a leading payment technology business, Form3 is applying their market leading API technology to solve this problem.
Form3’s market-leading API technology and Goldman Sachs’ established FX network provide a combined private-label solution to offer your customers access to a broad cross-border payments network, while continuing to define your own customer experience.
The collaboration between Form3 and Goldman Sachs brings together market leading API technology and world leading FX and correspondent banking capabilities. Form3 provides mission critical processes through a single JSON API integration.
Andrew is Head of Cross Currency - Specialist Sales at Form3, based in the UK.